Not a penny, but a dollar for your thoughts

Sunday

Nov 11, 2012 at 12:01 AM

I am a proponent of planning. It's planning for emergencies, planning for goals that you would like to achieve and planning our financial futures, being prepared for opportunities and pitfalls that may come our way.

I am a proponent of planning. It's planning for emergencies, planning for goals that you would like to achieve and planning our financial futures, being prepared for opportunities and pitfalls that may come our way.

In the past, it was easier to plan, particularly for retirement. To project a value into the future you need money.

Does the dollar still fit that criteria?

Many times I have mentioned it is increasingly difficult to predict how much money someone who is middle-aged or younger needs to retire. The reason it is so difficult is that the dollar in the United States has been fundamentally changed from money, which it was until 1971, to a currency which it is today.

Money has a stable value, has a limit to its quantity and is accepted as a store of value (expected to be worth tomorrow what it is worth today). A currency fluctuates more in value, is virtually unlimited in quantity and may or may not be accepted as a store of value.

Money has to have certain characteristics.

First of all money has to have value in itself.

Since our dollar was backed by gold until August of 1971 that was satisfied. Up until 1971 you could turn in $35 and get an ounce of gold. Today the dollar is backed by a promise to repay.

It is now backed by debt rather than a tangible asset. It has a perceived value rather than intrinsic value. Gold has to be mined and produced while currency can be key-stroked into existence in unlimited amounts.

The next characteristic is that there needs to be a limited supply. The reason for this is that if there is more currency than there is demand for currency, the price or purchasing power will go down — supply and demand.

With the Fed printing trillions of new dollars in the last few years there is another reason that the dollar may not be the greatest store of value. While it appears that the Fed is getting away with printing a lot of new currency with little consequences the facts are that inflation is hitting us harder than is being reported. We can all see this when we shop.

Another aspect of money is that it has to be accepted as payment and be consistent. It is actually the fact that money is consistent (holds value) that it is accepted. The day that there is a widespread question about a currency's value it will cease to be a viable form of payment. On that day, prices would automatically go much higher to compensate for an assumed loss of value. This has happened recently in Argentina, Brazil, Zimbabwe and other countries as well as Germany after the first and second world wars.

While our dollar is certainly durable and divisible as well as convenient to use, it is certainly not the asset that we became used to since the dollar was deemed the world's reserve currency at Bretton Woods in July 1944. This act made the dollar the asset upon which all other currencies and commodities were based. This is also what allows us to print so many additional dollars and still maintain value — the world uses it for trade creating a large demand.

As we speak, the world, led by China, is starting to shun the dollar in bilateral trade (trade amongst themselves). Currently they trade with numerous countries without using our dollar. It started with a few countries such as Russia, India, Brazil and South Africa and has recently come to include many South American countries, Asian countries including Korea and Japan and most recently lran and Germany.

Getting back to supply and demand — this can't be good.

It appears that many countries of the world are already questioning the dollar as a store of value for the long term. It is important that you do the same. It is imperative that if you determine that you need $2 million dollars to retire that it is the $2 million that our dollar is worth today and not what it may be worth in a number of years. The "value" may not be at all similar.

ln my opinion it would be wise to plan on having purchasing power when the major changes that appear ready to happen take place. It could well be the difference between retiring at an ideal age or retiring when you have recovered from unforeseen circumstances. Anyone who ignores the risk of a vastly devalued dollar is not taking into account one of our greatest challenges.

Mike Savage is financial adviser and president of Savage Financial Group in East Stroudsburg, which offers securities through Raymond James Financial Services.